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Journal Article
The Changing Investor Composition of U.S. Treasuries, Pt. 2: Who’s Buying U.S. Treasuries?
Part 1 of this two-Bulletin series highlights the changing demand among foreign investors for U.S. Treasuries. In Part 2, we explore how the composition of Treasury investors has shifted toward more yield-sensitive domestic private investors—such as banks, money funds, and hedge funds. This shift in investor composition has not only increased yields but also raised volatility.
Journal Article
Bank Funding and FHLB Advances
The composition of bank funding has changed considerably since the onset of the COVID-19 pandemic, revealing not only the importance of Federal Home Loan Bank (FHLB) advances in times of stress but also sized-based differences in access to capital markets once the stresses abate. The latter raises the question of whether large banks in particular can replace deposit outflows with capital market funding instead of relying on contingent funding from FHLBs.
Journal Article
How Have Banks Responded to Declining Reserve Balances?
Reserve balances have declined by more than $1 trillion since 2014, leading banks to increase their holdings of other high-quality assets to meet liquidity requirements. However, the composition of these assets varies substantially across banks, suggesting the drivers of demand for reserves are not uniform.
Journal Article
The Global Pandemic and Run on Shadow Banks
In March, the global coronavirus pandemic led to a period of financial stress in which credit conditions tightened at an unprecedented pace. Elements of this stress period can be explained as a classic run on “shadow banks”—nonbank financial institutions that fund long-term assets with short-term debt. Although timely Federal Reserve interventions restored some calm to markets, shadow banks remain vulnerable to future runs because they lack the safeguards available to regulated depository institutions.
Journal Article
Bank Profitability Rebounds despite Compressed Interest Margins
While traditional sources of U.S. bank revenues have struggled during the pandemic, overall bank profitability has soared. This unusual deviation is largely explained by a substantial decline in banks’ loan loss provisions. Extraordinary policy measures undertaken by the Federal Reserve and U.S. Treasury aided a rebound in financial market conditions and, in turn, reduced projected loan losses. However, this effect is likely to be transitory, suggesting an uncertain future for bank profitability.
Journal Article
Assessing Market Conditions ahead of Quantitative Tightening
Quantitative tightening (QT)—the reduction in the Federal Reserve’s balance sheet—will transfer a significant amount of Treasury and agency mortgage-backed securities to investors. This transfer will be larger than the first endeavor with QT in 2017 and will occur at a time when financial markets are strained, suggesting this round of QT has the potential to be more disruptive compared with the benign start to the 2017 runoff.
Journal Article
Is Bank Capital Regulation Driving Continued Use of the Overnight Reverse Repurchase (ON RRP) Facility?
Use of the Federal Reserve’s overnight reverse repurchase (ON RRP) facility rose in 2022, coinciding with deposit outflows and declining reserves at commercial banks. A popular narrative suggests that regulatory capital requirements discouraged bank deposit-taking, driving up ON RRP use. However, this story neglects important contributors to the ON RRP’s surge. We find that limited money market investment opportunities, policy uncertainty, and administrative changes likely explain increased ON RRP activity.
Journal Article
Considerations for the Longer-Run Maturity Composition of the Federal Reserve’s Treasury Portfolio
The Federal Reserve’s Treasury portfolio is weighted toward long-duration assets, reflecting large-scale asset purchases deployed after the financial crisis and again during the pandemic. In the longer run, policymakers may prefer to return to a shorter-duration Treasury portfolio like the Fed maintained before 2008. However, the exact composition of the portfolio will depend on how policymakers balance competing considerations: policy space, interest rate risk, market neutrality, and safe-asset provision.
Journal Article
Did Local Factors Contribute to the Decline in Bank Branches?
Although the total number of bank branches in the United States increased from the mid-1990s to 2007, this number has declined since the 2007-08 financial crisis. A loss in bank branches is potentially problematic because it may reduce customers' access to financial services as well as small businesses' access to credit. Changes in local conditions may partly explain this loss: the number of branches varies significantly across geographic areas, and local conditions have been shown to influence past trends in bank branching. Rajdeep Sengupta and Jacob Dice examine the relationship between ...
Journal Article
Do Adverse Oil Price Shocks Change Loan Contract Terms for Energy Firms?
This article examined whether the relationship between creditworthiness and loan spreads for energy firms in the syndicated loan market changed after the 2014 oil-price shock. {{p}} The authors use syndicated loans, which are jointly funded by several financial institutions, because the syndicated loan market is a major source of debt financing for oil firms. Credit conditions tightened following the oil-price shock in mid-2014.